The SBA's proposed 7(a) reforms deserve congressional support

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Congress should support the Small Business Administration's recently published rules to streamline its 7(a) program and lift the 1982 moratorium on issuing more licenses to state and SBA-regulated nondepository lenders. The SBA has long played an essential role in providing funding and support to small businesses, but its processes and programs have not kept pace with the rapidly changing financial landscape. 

Streamlining the program will lower costs for small businesses and admitting more lenders will increase the distribution of smaller loans to the smaller of small businesses.

Too many small businesses, particularly those in underserved communities, continue to face significant barriers to accessing the affordable capital they need to start or grow their businesses. Nearly half of the 33 million small businesses in the U.S. experience funding gaps, and only 51% receive the full amount of financing they seek. Today, 51% of Black-owned businesses, 40% of Hispanic-owned businesses, 36% of Asian-owned businesses, and 30% of white-owned businesses experience financial challenges due to lack of credit availability. These gaps in access to affordable credit stifle economic growth, and they are being exacerbated due to banks' unwillingness to lend to Main Street in this uncertain economic climate.

Fortunately, "fintech" lenders are filling the credit gap. According to a recent study by the Bank for International Settlements and the Federal Reserve, "fintech lenders have a potential to create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost."

The SBA has relied largely on relatively few banks and credit unions to distribute the bulk of its $25 billion of loans. While there are more than 11,000 banks and credit unions in the U.S., so far in 2023, only 1,150 banks and 125 credit unions have made at least one 7(a) loan. In the two years preceding the COVID-19 pandemic, 83% of community banks failed to make a single 7(a) loan. Only 600 participating lenders make more than 10 loans a year. Of the 2,200 SBA lenders, 25 make 50% of 7(a) loans. Additionally, the average loan size in the 7(a) program has steadily increased year over year to well above $600,000 while the number of loans under $250,000 has decreased.

The agency has wisely made the decision to incorporate more lenders that are making smaller-dollar loans at scale to underserved communities into the 7(a) program by permitting three additional small-business lending company (SBLC) licenses. However, while some in the industry view the inclusion of more nondepository lenders as a competitive threat, it should be viewed as an opportunity. The more than 10,000 banks, credit unions and community development financial institutions that don't offer 7(a) loans in their communities should partner with fintech lenders to leverage their end-to-end digital lending platforms, built and tested over the last decade, to make 7(a) loans profitably and at scale without the need to buy or build their own platforms — a cost-prohibitive investment for most.

Small business banking

SBA finalizes rule to open flagship 7(a) program to fintechs

April 16, 2023 9:00 PM

Some lawmakers cast fresh doubts on SBA's rules to modernize the 7(a) program to meet the needs of today's small businesses. Recent congressional hearings highlighted a conflation, or perhaps misunderstanding, of the proposed rules by some lawmakers. SBA's proposal to lift its self-imposed 40-year moratorium on permitting additional SBLC licenses does not open the 7(a) program to fintechs for the first time. "Fintech" lenders are able to participate in the 7(a) program today, but are either limited to lending in one state or are required to purchase one of the existing 14 SBLC licenses, should one become available, in order to offer 7(a) loans nationwide.

The 14 licenses have been held by at least 60 different state-licensed and regulated nondepository institutions since 1982, and currently three of the top 10 7(a) lenders by volume are state-licensed and regulated nondepository SBLCs that operate online nationwide. The 14 SBLC lenders are among the more than 200 nondepository lenders overseen by SBA every year. Lifting the moratorium has bipartisan, bicameral support in Congress and would end the program's "taxi-cab medallion" oligopoly, thus allowing the very lenders that are serving the smallest most underserved small businesses the ability to provide much needed capital on reasonable terms and conditions.

Concerns remain regarding fraud in the Paycheck Protection Program (PPP) and Congress has a responsibility to taxpayers to ensure fraudulently obtained pandemic relief funds are recovered. However, lawmakers should not conflate 7(a) loans, a long-standing program that has sufficient standard operating procedures, with PPP, an emergency relief program. It is clear that PPP fraud was an issue of poor program safeguards among a few lenders and a lack of due diligence and oversight of their nonlender service providers. It was not a uniquely "fintech" issue.

Congress should focus on opportunities to expand access to capital through its various economic levers, promote responsible lending practices and ensure the SBA is appropriately resourced to fulfill its mission to serve the interests of American small businesses. Modernizing the SBA would help to address enduring issues of systemic inequality and lack of access to financial services in underserved communities. By increasing access to capital for small businesses in these communities, we can help to level the playing field and ensure that all entrepreneurs have an equal chance to succeed.